Apr 15, 2015
Executives
David Baggs - Investor Relations Michael Ward - Chairman, President and CEO Fredrik Eliasson - EVP and CFO Clarence Gooden - EVP of Sales and Marketing and Chief Commercial Officer Oscar Munoz - EVP and COO
Analysts
Christian Wetherbee - Citi Research Tom Wadewitz - UBS Alison Landry - Credit Suisse Rob Salmon - Deutsche Bank Thomas Kim - Goldman Sachs Ken Hoexter - Merrill Lynch Bill Greene - Morgan Stanley Brandon Oglenski - Barclays Brian Ossenbeck - JP Morgan Matt Troy - Nomura Securities Ben Hartford - Robert W. Baird Cherilyn Radbourne - TD Securities David Vernon - Sanford Bernstein John Larkin - Stifel Nicolaus Bascome Majors - Susquehanna Jeff Kauffman - Buckingham Research Scott Group - Wolfe Research Jason Seidl - Cowen and Company Keith Schoonmaker - Morningstar Justin Long - Stephens
Operator
Good morning, ladies and gentlemen and welcome to the CSX Corporation First Quarter 2015 Earnings Call. As a reminder today’s call is being recorded.
During this call all participants will be in a listen-only mode. For opening remarks and introduction I would like to turn the call over to Mr.
David Baggs, Vice President, Treasurer and Investor Relations Officer for CSX Corporation. Sir, you may begin.
David Baggs
Thank you and good morning everyone. And welcome again to CSX Corporation’s first quarter 2015 earnings presentation.
The material that we'll be reviewing this morning along with our expanded quarterly financial report and our safety and service measurements, are available on our Web site this morning at csx.com under the Investor section. In addition, following the presentation a webcast and podcast replay will be available on that same Web site.
This morning, our presentation will be led by Michael Ward, the Company’s Chairman and Chief Executive Officer; and Fredrik Eliasson, our Chief Financial Officer. In addition Oscar Munoz, our President and Chief Operating Officer; and Clarence Gooden, our Chief Sales and Marketing Officer will be available during the question-and-answer session.
Now before we turn the presentation over to Michael, let me remind everyone that the presentation and other statements made by the Company contain forward-looking statements. You are encouraged to review the Company’s disclosure in the accompanying presentation on Slide 2.
This disclosure identifies forward-looking statements as well as the uncertainties and risks that could cause actual performance to differ materially from the results anticipated by these statements. In addition at the end of the presentation we will conduct a question-and-answer session with the research analysts.
With nearly 30 analysts covering CSX today, I would ask as a courtesy for everyone to please limit your inquiries to one primary and one follow-up question. And with that let me turn the presentation over to CSX Corporation's Chairman and Chief Executive Officer, Michael Ward.
Michael?
Michael Ward
Well, thank you David and good morning everyone. Yesterday CSX reported first quarter earnings per share of $0.45 up 13% from $0.40 reported in the same period last year.
The Company also generated double-digit growth in operating income, net earnings and earnings per share. Revenue in the quarter was $3 billion with continuing broad based demand for freight transportation.
We see better pricing vibrancy than in previous years and we’re pursuing new growth opportunities in the merchandised and intermodal markets. These efforts are helping to offset the headwinds in coal the impact of a stronger U.S.
dollar and lower fuel recovery. In addition, lower fuel price and cost saving initiatives decreased expenses in the quarter.
As a result, operating income increased 14% to $843 million and the operating ratio improved 330 basis points to 72.2. While operations remain stable sequentially during the quarter, we expect sustained improvements going forward driven by the combination of resource investments coming online, asset utilization adjustments and the extraordinary efforts of our employees.
Specifically, we expect the positive trends we’ve seen over the past few weeks to gain momentum in the second quarter and accelerate in the second half of the year as we progress towards the record levels of service we saw in 2012 and 2013. These efforts will drive our ability to continue pricing ahead of rail inflation, growing merchandised and intermodal faster than the economy and improving efficiency which is expected to produce savings approaching $200 million this year.
With that foundation, we took action just yesterday to reward our shareholders with a 13% dividend increase and a new $2 billion share buyback program that we expect to complete over the next 24 months. Now, I will turn the presentation over to Fredrik who will take us through the top and bottom line results as well as our shareholder actions in more detail, Fredrik?
Fredrik Eliasson
Thank you, Michael, and good morning everyone. Let me begin by providing some more detail on our first quarter results.
Top line growth slowed in the first quarter with revenue slightly up versus the prior year and volume up 1%. These results reflect weaker market conditions in domestic coal a stronger U.S.
dollar and the impact of winter weather which together suppress volume growth across the industry. Revenue per unit was flat in the first quarter and includes the impact of lower fuel surcharge revenue which declined $89 million versus the prior year.
Core pricing for the quarter was 1.6% overall and 3.4% excluding coal. Other revenue increased $23 million versus the prior year driven mainly by higher liquidated damages.
However, we incurred a similar year-over-year increase in train accident cost stemming from the Mount Carbon West Virginia derailment, which essentially offset the game in other revenue. Expenses decreased 4% versus last year driven primarily by the impact of lower fuel prices.
Operating income was $843 million up 14% over $104 million versus the prior year. Looking below the line interest expense and other income were similar to the prior year period and income taxes were $261 million in the quarter, reflecting an effective tax rate of approximately 38%.
Overall net earnings were $442 million and EPS was $0.45 per share up 11% and 13% respectively versus the prior year period. Now let me turn to the market outlook for the second quarter.
Looking forward we expect a generally flat demand environment in the second quarter as we cycle the strong surge in pent-up demand during last year's second quarter then volume increased 8%. Overall we are projecting favorable conditions for 49% of our markets in the second quarter and stable to unfavorable conditions for the remaining 51%.
We expect strong intermodal growth to continue as our strategic network investments support highway to rail conversions and growth with existing customers. Increased infrastructure development products are driving a favorable outlook for minerals.
Agriculture is neutral as strengthened domestic grain shipment is offset by weakened export grain market resulting from the strong U.S. dollar.
Automotive is expected to grow modestly driven by projected North American light vehicle production. The outlook for chemicals market is also neutral due to a reduction in drilling activities stemming from the low commodity price environment.
As a result we expect crude volumes from the remainder of the year to hold relatively flat to the level we saw in the first quarter. We have sustained low natural gas prices under $3, domestic coal volumes was adversely impacted in the first quarter and we expect volume to decline in the second quarter and to be down at least 5% for the full year.
Export coal volume is expected to be lower in the second quarter reflecting to oversupply and the strong U.S. dollar.
While volumes have held up recently well in the first quarter, we still expect about 30 million tonnes for the full year. The strong U.S.
dollar is particularly impacting the metals market where U.S. steel production is down 12% year-to-date.
Overall the key drivers for a flat demand outlook in the second quarter or the change in commodity prices, the cycling of a period of strong pent-up demand during last year second quarter and a strengthening U.S. dollar.
Turning to the next slide, let me talk about our expectations from expenses in the second quarter. Beginning with Labor and Fringe, we expect second quarter average headcount to be essentially flat sequentially.
On a year-over-year basis this represents a 3% increase driven by T&E employees added over the course of the last 12 months to support service. We expect second quarter labor inflation to be around $35 million similar to the level seen in the first quarter and then moderate to around $25 million dollars per quarter in the second half.
As we saw in the prior quarters, there will be a $10 million to $50 million shift between the labor and MS&O expense lines in the second quarter as a result of the locomotive maintenance agreement we amended in June of 2014. This will be the last quarter that we are cycling this expense shift.
Looking at MS&O expense, we expect the second quarter to be driven primarily by inflation and higher resource levels versus the prior year, partially offset by efficiency savings. Fuel expense in the second quarter will be driven predominantly by lower cost per gallon reflecting the current price environment and a continued focus on fuel efficiency.
We expect depreciation in the second quarter to increase around $10 million dollars versus the prior year reflecting the ongoing investment in the business. Finally equipment and other rents in the second quarter is expected to stay relatively flat to last year with higher freight car rates offset by improving cycle times.
Turning to the next slide, as Michael mentioned, CSX will be increasing its dividend. The company will pay a dividend of $0.18 per share starting in the second quarter which represents a 13% increase.
This build on 13 dividend increases we've made over the last 10 years and a 26% CAGR over that period and reflects the underlying strength in our core business. Our second quarter dividend increase will result in a payout ratio of 36% of trailing 12 months earnings.
Going forward we're expanding our target payout range to 30% to 40% which reflects our confidence in the future earnings power of the company. In addition to the dividend increase CSX is also initiating a new share buyback program.
CSX remains committed to utilizing share buybacks to return cash to investors, and as such we have announced a new $2 billion buyback program which is double the size of our previous program. We expect the program to be completed by the end of the first quarter 2017.
This program will be conducted on a pro-rata basis during that period and is expected to be funded by debt, excess cash and free cash flow from the business. Going forward, we expect to sustain our current BBB +, BAA1 credit profile with balances our financial flexibility and cost of capital through the business cycle while targeting a debt to EBITDA ratio in the low 2s.
Now let me wrap up on the next slide. Overall CSX delivered strong bottom line results in the first quarter and this is now a third consecutive quarter of double-digit EPS growth while top-line growth was lower than our initial expectations due to volume headwinds, productivity gains and improved pricing contributed to strong earnings growth this quarter.
While we continue to see strength across many of our merchandise in intermodal markets headwinds in coal are not greater than we anticipated at the start of the year. Domestic coal volumes are being impacted by the low natural gas price environment and we now expect volumes to be down at least 5% this year.
In addition, export coal continues to be challenged by soft global market conditions and we’re maintaining our full year guidance of 30 million tonnes. Looking at the second quarter as we previously mentioned, we will be cycling a very strong demand environment from last year resulting in an overall flat volume outlook.
In addition, since we do not expect to see the full benefits from the resources we’re until later this year, we now project second quarter EPS to be flat to slightly up on a year-over-year basis. Looking at the full year 2015 earnings with our first quarter results being less robust than originally expected and with our new projections for the second quarter, double-digit EPS growth has clearly become more challenging.
As a result, we’re updating our guidance to mid to high single-digit EPS growth for the full year. While our growth expectations this year are diminished, we still expect to have a strong margin expansion by remaining focused on pricing above inflation, delivering efficiency savings approaching $200 million and driving a stronger service product for our customers.
Bottom line CSX is committed to delivering full earnings potential of the business and maximizing value for shareholders. Our second quarter dividend increased and a new $2 billion buyback program reflects our confidence in the company’s future.
With that, let me turn the presentation back to Michael for his closing remarks.
Michael Ward
Thank you, Fredrik. Before I begin my closing remarks on behalf of all CSX employees, I want to extend our heartfelt sympathies to the family, friends and colleagues of one of our employee who was fatally injured in the switching yard earlier this month.
His death is a tragic reminder of why safety is and will remain our first and highest priority. Turning to our closing thoughts on the quarter, we continue our work to transform this railroad by consistently expanding the most diverse business mix in company history.
We’re investing growth markets, technology to improve safety, service and efficiency and innovative ways to collaborate with our customers. As we’ve said the foundation of that transformation and those innovations is service excellence which creates value for our customers and enhances our ability to price above rail inflation grow merchandised and intermodal faster than the economy and improve efficiency and asset utilization.
In short, these are the actions that will drive CSX to the mid 60s operating ratio. We are relentlessly focused on that goal and the shareholder actions we’ve announced clearly underscore our confidence.
CSX is committed to maximizing new opportunities as we continue our critical role in serving with a growing American population and expanding global supply chain all while creating sustainable value for you our shareholders. And now we will take your questions.
Operator
Thank you. We will now be conducting a question-and-answer session.
And our first question comes from Christian Wetherbee from Citi Research. Your line is now open sir.
Christian Wetherbee
I was wondering if you maybe talk a little bit bigger picture about sort of the balancing of resources relative to the sort of the volume outlook, it seems from a volume perspective a little bit more of a sluggish sort of outlook for this year across the industry and as we’re kind of recovering from a service perspective over the last year or so obviously you have more resources coming on board, taking a step back do you think sort of -- do you feel like the network is balanced enough or sort of when do you reach that point where you can kind of think a little bit more strategically about sort of the resources you bring on to network relative to the outlook of the volumes?
Oscar Munoz
Christian, it’s Oscar, it’s probably appropriate for me to take that one since we do think a lot about that. And again I think a couple of things about how you think about with regards to the moderating volume forecast, we still have quite a strong baseline from the growth we had last year.
So there is from an operational perspective quite a bit of work to do, so I’ll have comment what happened to last year with that kind of growth, we are actually glad to be in a position where we may indeed have a slightly higher level of resources than we need. But again with the increased volatility we’re facing and all the other issues, I think we’re pretty comfortable with that.
I might take the entire listening group to back to '09 where we did some extensive work around the sort of variability of the industry and certainly CSX and I think those facts and data there prove to be again rough order of magnitude of third of third of third where a third is relatively fixed and you really can’t get out it other than our very long, long period of time. But two-thirds of that we bifurcated into sort of a short-term variable aspect which is immediate unit trains we can shutdown, but we kind of went through this long-term variable cost aspect of that where we can take steps and I think as we think about this very question and you hear about something like variable trains scheduling which is initiative we kicked off a month ago.
That’s part of a long-term variable cost adjustment that we’re working through. So the obvious results or the obvious initiatives that we can take when volume moderates is we can put our locomotives into storage very quickly, we talked about that a couple of years ago, and certainly the furlough aspect is available to us, so we think about it, we think about it hard, we have some strategy around it.
We do not see that coming into play over certainly the next couple of quarters with the kind of baseline growth we have from prior year.
Christian Wetherbee
And then just when you think about sort of the longer term growth potential of the business, so we’re now going to be I think about three years sort of in this mid to maybe high single-digit growth rate down from the double-digit expectations earlier this year. How do you think about sort of the longer term outlook for the business?
Is it possible to ramp back up to double-digit EPS growth, or you think about things like coal, and sort of the overall volume environment is potentially being somewhat limiting to that ability.
Fredrik Eliasson
This is Fredrik, I think that all depends on your assumption about coal, but I think you’ve seen that we just have three quarters in a row where we had double-digit earnings growth though we think that it is certainly possible for us to do that, it just depends on how much the headwind is on coal. We’ve had three years of very significant headwinds in coal that clearly has impacted our earnings growth, but at some point we believe that’ll moderate and when it does we do feel that what we have lined out in terms of our inflation, plus pricing continue to drive productivity in excess of 130, 150 a year and continued to grow with economy as the markets allow.
I think we have an opportunity to continue to get back to very strong earnings growth going forward.
Operator
Thank you. And our next question here comes from Tom Wadewitz, UBS.
Your line is now open sir.
Tom Wadewitz
Want to ask you, I guess just start with a question on utility coal. Fredrik I think you said 5% or more decline in utility, I think that’s been your comment for the last, I don’t know six weeks or so.
Can you give us a little more color in terms of where you think stockpiles are at in the south and in the northern parts of your network? And how much I guess visibility you have to that being down five -- five sounds like potentially an optimistic number given where natural gas prices are.
So just wondered if you give a little more color on the kind of utility coal picture and then maybe rest of that 5% decline.
Clarence Gooden
Tom, this is Clarence, the stockpiles in the north and the south are both well above the target levels and that’s particularly true when you take the reduced burns that are rates that are into account. In March the stockpiles were about 85 days at the current burn rates in the north and about 180 days in the south.
Tom Wadewitz
I mean if stockpiles are that high, I would guess your normal target is something like what 60 or 65 days or maybe.
Clarence Gooden
It varies in the north versus in the south and you’re right about 65 days in the north, it’s a little bit higher than that in the south but not much.
Tom Wadewitz
So if the stockpiles are that high and natural gas prices are as low as they are. Do you think there's risk that your utility coal is down quite a bit harder than 5%?
Clarence Gooden
There's some risk that it's slightly down more than 5%. Depends on what the weather conditions will be this summer, we're hoping they're going to be hot.
Fredrik Eliasson
And Tom just to clarify, this is Fredrik, what we've said it's at least 5% to put a lower level or a higher level on it, depending how you look at it.
Tom Wadewitz
And then on liquidated damages, can you just give us a rough sense of how to forecast that the next couple of quarters, that was obviously a little higher than we thought in the first quarter.
Fredrik Eliasson
Sure Tom. I think that for the rest of the year at least based on the visibility we have today we don't expect any material liquidated damages.
Tom Wadewitz
So flat, year-over-year for other revenue or…
Fredrik Eliasson
If we just look at each quarter I don't think it's going to be more than $5 million to $10 million if that, in terms of absolute amount.
Tom Wadewitz
5 million to 10 million.
Operator
Thank you. And our next question comes from Alison Landry from Credit Suisse.
Your line is now open.
Alison Landry
I wanted to actually ask about how we should be thinking about the progression of coal yields for the balance of the year, and is there a possibility that RPU could be up in spite of fuel and sort of the things that I'm thinking about are lapping of the export coal rate concessions which I believe happens in 2Q, correct me if I'm wrong. And then thinking about the new fixed variable contract structure on a meaningful portion of the domestic book with volume declines, I would expect the yields to rise on that.
Am I thinking about that correctly, what are some of the other factors that would move that up or down?
Fredrik Eliasson
This is Fredrik, I'll start with then I'll let Clarence add any thoughts there. I think that from a fuel perspective I think you're going to continue to see pressure in the remaining three quarters of the year.
We benefitted a little bit here in the first quarter from the lag, so you're going to continue to see that impact in RPU for the full year, at least based on where we're seeing fuel today and probably more so than we saw in the first quarter. You were right that as we get through the second quarter we are lapping the decreases that we took last year for export coal and that should be beneficial as we get to the second half, And I always point our investors to looking at the same-store sale, that’s where we provided there because I think that’s a much more meaningful number to look at because that gives you true indications what’s going on from a pricing perspective, and with the fuel surcharge mechanism that is designed to make us neutral to fuel price volatility with exception of lag.
I think when you look at that perspective I think that gives you more better view of it, but fuel surcharge revenue will be low and it will year-over-year it is going to impact the yields negatively throughout the year.
Alison Landry
But you don’t think that lapping of the sort of concessions and then with the fixed variables structure if volumes are down then yields theoretically should be up that’s not enough to offset the fuel decline in other words?
Fredrik Eliasson
I think it will be helpful but I am not sure it’s going to be enough to offset the impact we’re seeing from fuel.
Alison Landry
And then just a follow-up question based on some of the numbers you gave in the release it looks like the productivity gains in the quarter were around 18 million. Should we expect to step up in the second quarter or would you say that the bulk of roughly 200 million is expected to be realized in the second half as service is restored?
Fredrik Eliasson
Yes, so if you look at the different line items in our quarterly flash, you will see that if you added up between labor, MS&O and fuel that it was about $38 million in the quarter. In total and that is obviously the first quarter of our target to get to something that approaches $200 million for the year.
Operator
Thank you. And our next question comes from Rob Salmon, Deutsche Bank.
Your line is now open, sir.
Rob Salmon
Very strong performance with regard to the core price increases, could you give us a sense in terms of the expectation and the cadence as we look out through the remainder of the year, have we kind of experienced kind of the full benefit of those stronger pricing increase in the first quarter or can we potentially see a step up as we look out through the duration of the year particularly in intermodal?
Clarence Gooden
No, Rob, this is Clarence; I think you can expect to continue to see our pricing increase. I think we've mentioned in the fourth quarter that we had begun fairly aggressive pricing earlier in the year.
Our third quarter same-store sales pricing in our merchandise area was 2.5 in the fourth it was 2.7. In this quarter as you saw it was 3.4, so I think you can continue to see a continual increase in our same-store sales pricing and in our business as we move throughout 2015.
Rob Salmon
But that's really helpful. I guess Clarence I think you had mentioned about the little bit -- speaking little bit more positively about the potential for international intermodal conversions over to East.
Could you give us your updated thoughts in terms of what that opportunity is looking like for kind of '15 and then as well as longer term perspective?
Clarence Gooden
I think the water is little muddy and unclear given the situation is and ongoing is in the West. I continue to believe that there will be diversions to the Gulf in the East Coast as more and more customers get comfortable with what is going to finally emerge with the canal and with the post West Coast strike.
It's just too early to see how that's going to settle out and as you know there is a lot of congestion up and down in the East Coast so that's going have to settle down for people to make decisions, but I think you'll see more than what even we had anticipated seeing as time moves on over the course of the next couple of years.
Operator
Thank you. And now our next question comes from Thomas Kim, Goldman Sachs.
Your line is now open.
Thomas Kim
I had a couple of questions just with regard to the near-term guidance, with your 2Q EPS is that including buybacks?
Fredrik Eliasson
Yes, that is in all view, yes.
Thomas Kim
And then with regard to the outlook for the year, does your guidance assume the fuel prices increase as a forward curve would imply?
Fredrik Eliasson
I think we've just included whatever the forward curve currently is that we're seeing out there. I don't think it's a significant difference from what we're seeing right now, but yes whatever the forward curve dictates.
Operator
And our next question comes from Ken Hoexter, Merrill Lynch.
Ken Hoexter
Can you clarify the other revenues, is that $5 million to $10 million comment from other revenues from liquidated damages, is that a change or year-over-year increase of 5 million to 10 million or you're only looking for 5 million to 10 million from now on, on the entire other revenue line?
Fredrik Eliasson
Ken, and I think I've heard at the beginning of you question, so I'll just to make clear. On liquidated damages what we are expecting for the rest of the year, if I look at the each quarter it looks like it's going to be somewhere between $5 million and $10 million of absolute amount of liquidated damages not year-over-year.
Ken Hoexter
And then just on, looking at operations Oscar, the on time originations is fallen a 50% arrivals down to 41%. Kind of all the way back to the start of the one plan here going back to 2005.
Can you kind of just talk through what's going on, what needs to happen, why we're not seeing maybe even a more negative impact on that from operations or cost side, and what needs to swing back into the positive on that.
Oscar Munoz
I think it's what we've been saying for the last almost year, the amount of growth that came on to our very structured and disciplined one plan was the only missing part was the amount of resources in order to run it. And I think we've been fairly consistent with saying, as those resources arrived well trained and well manufactured we can put them to good use and start to spin again and that's exactly what's been happening over the last month along with our own initiatives and the efforts of our employees.
And so the -- the really last saving kind of grace is this locomotives arrival that are beginning to trickle in here, some in the first quarter and second quarter. That's the big factor in the whole business and I think again we've been consistent with this second quarter being sort of the vital point and then the increasing level of service that we'll get in the back half of the year and then again trying to approach the record levels we had just a couple of years ago.
Ken Hoexter
So the crew basis where you think it should be now, is that correct?
Oscar Munoz
Literally we've got 400 people here in the first quarter that came out, we'll have another 400 to 500 that come out here in the next three months and then it tapers off. And so, resources from a crew perspective I'd say other than a couple of spot areas we're in very-very good shape and that's caught up and that's been a six to nine month sort of initiative to get those folks well trained and ready to work.
Ken Hoexter
So just to clarify then on maybe the cost per employee, do we see that ramp up or is that at the levels you want it now?
Oscar Munoz
I think it's essentially at the level, we'll have a few more people coming in here in the second quarter, some of it is for attrition but some of it's for a specific areas of shortage and in terms of the cost per employee I think to some degree over time we expect the cost of employee to come down, because right now we're working in a very elevated level of overtime and so the cost of employee should over time moderate from where we are right now and have been for the last few quarters.
Operator
Thank you. And the next question comes from Bill Greene, Morgan Stanley.
Bill Greene
Oscar and Michael I know you sort of are aware of this and we look at the eastern rails, the margins have sort of moved towards the lower end of the group. And I'm curious your thoughts on, I realize there's a priority of things we have to do so coal has been a challenge recently and we want to get the service right.
But when do you sort of come back and say, let's take pen to paper here and let's really figure out how we're going to get the costs out, because coal may never come back and while the pricing can accelerate maybe there's a lot more we can do on costs. How do you think about 2016 or '17 or even longer term about addressing that and getting you guys back toward these long-term targets, mid 60s, try to accelerate that as best you can.
How do you think about doing that from a cost standpoint?
Michael Ward
This is Michael, and I think you're quite right, so, I guess as we look forward the coal has been a challenge to both the eastern roads. And I think as we look forward it's about how do we grow the other businesses intermodal or merchandize above the rate of the general economy which we have been doing.
Price above inflation which, that is actually accelerating and start getting new cost out and as you know we targeted $200 million this year and we think the combination of those three, some modest growth, pricing above inflation and good cost discipline and efficiency will drive us towards those mid 60s.
Oscar Munoz
And Bill I would add at the trailing part of your question you specifically mentioned how that relates to cost and I think Michael's concept is a great one, it's not just about one thing, it's about pulling all the levers we pull historically, but specifically to address the cost aspect of it. It's the normal productivity we've been able to achieve plus some and so the plus some is initiatives and objectives that probably sort of border on more innovative and potentially in the world of rail roading a little bit more risky people think.
So these variable scheduling thing that we've done, I mean as you read the press about that, half the people are supportive and the other half are oh my god, they're going to tank the whole place by doing all this crazy stuff. You got to understand the things that we do we think through very thoroughly, we plan through it and we'll communicate to our folks and that particular program right now is just really, it's freed up 50 locomotives in a month.
Our metrics are starting to go up for a lot of different reasons but including that. But I guess my point on the cost side is it's an efficiency play it's not just necessarily a wholesale reduction in people.
Efficiency creates productivity and productivity creates the economic value that you're coming. So pull all the levers, the cost one's a big one, the rate that we're increasing this year is probably a rate that we'll keep thinking about in the next future years to get to that mid 60s.
Bill Greene
And when we think about the challenge that occurred in 2014, partially that was weather but partially significant growth in volume and then as we look at what you've just sort of walked me through here, the volume aspect of it, it would almost seem to me that the more profitable way to do it would be to focus on both price and productivity. Volumes can do what they'll do but growing faster than the economy actually would seem to make it more difficult to solve the service issue.
Am I missing a piece of that?
Oscar Munoz
Yes, in a way, because when we talk about growing faster the economy you may remember last year the second quarter we surged 8%. We don't do surge as well we do 2% to 3% growth very well.
So, our hope is that we can modestly grow at a little bit above the inflation. We can adjust to that kind of growth there is just surges we don't do well Bill.
But I agree with you it's clear to the pricing and productivity are more under our control and obviously we are going to focus intensely on those, but we do think that third equation, some growth above inflation will create shareholder value.
Bill Greene
And just one point of clarification on that last point, does the growth above inflation require higher levels of CapEx or you are at where you need to be?
Oscar Munoz
I think the 16% to 17 % we have been at, historically will take care of it going forward.
Operator
Thank you. Now our next question comes from Brandon Oglenski from Barclays.
Brandon Oglenski
So, Michael or Oscar this is -- kind to be the third or fourth year now when we've taken guidance down and yet your lead off the release last night with the $2 billion buyback. So can you put in context, what the board is thinking and up in the buyback right now, in the midst of what seems to be another challenging year for all the reasons we've discussed on this call.
Michael Ward
Brandon I think, we've all along thought that the best way to create shareholder values are balanced approach to capital deployment and cash deployment, so we are going to spend $2.5 billion this year, 17% above revenues investing for growth in the future. Secondly, this increase on our dividend takes us a little bit above a 2% yield which some of our shareholders value that dividend, we think we want to be a little bit above the average for the S&P 500 and the share buybacks the 2 billion we think it helps those shareholders alike buybacks, so we think that balance deployment of doing all three, really is the best way to create shareholder value as we've done over the past decade.
So I don't view this is very different than what we have been doing and a way to create a strong shareholder value going forward.
Oscar Munoz
And Brendon, this is Oscar, you kind of ask how does the board think about it, so being a board member on different place than here out our company the way board members think about it, any time you project sort of forward things like this, they're based on a base line of financial strength and economic viewpoint that there is growth and strength in this business and in this particular company that can actually pay for that, so it's a very thorough review processes, it's not something that gets done very lightly. So we have a lot of potential for growth, we weathered a significant storm here over the last few months, and I know it's hard to go back to it but you lose that kind of volume stream and revenue stream and operating profit strength and make it up and stay even.
That's the strength of our business, now we got to build upon that and clearly our board sees that benefit has approved the initiatives that we've opened up here with.
Brandon Oglenski
And I guess to follow up on Bill Green's question on margins, there is other U.S. carriers that do have 20% of their revenue exposure in coal, they haven't had great outcomes either on the volume side, and growth hasn't been right for the industry for the last 10 years.
And yet, we've seen a lot of margin traction on price and productivity. I know that’s part of your plan.
But what is changing in the forward outlook for CSX that suggest we are going to get significant margin expansion beyond just the fuel contribution in 2016 or 2017, that I assume took to the board and said it doesn't make the shares relatively attractive at this point in time. And are you willing to put out a long-term margin target like you did I think back in 2010 or 2011 when we said we are going to be at a 65 OR by 2015.
Oscar Munoz
On the first part of your question about the margin expansion, I think if you look at the underlying business that we have, that has actually been expanding over last couple of years, but the headwind from almost a billion dollars loss of coal has offset that. So we are comfortable, when we look at the underlying core earnings part of our company, that it's clearly capable of continuing to expand margin over time similar to what you have heard earlier.
In terms of setting a target out there and so forth, I think what we have said before and I think you know in 2011 we set a target for 2015 of mid 60s and with the exception of what happened in our coal business that is clearly outside of our control, we would have been there. What I've said repeatedly has been, that I think what we need to do right now is to establish some progress here and hopefully we will do that this year of sustained margin expansion and some earnings growth, and hence once we have that track record behind us, I think we can step back and say are we comfortable now to put another target out there.
But I think right now our focus is margin expansion this year, and continued earnings growth.
Operator
And our next question here comes from Brian Ossenbeck, JP Morgan.
Brian Ossenbeck
So you mentioned that frac sand volumes were down in the first quarter and highlighted the reduced energy related drilling activities. Would you expect kind of similar decline in the second quarter from sands or will it accelerate up with the rest of the year as the E&P is kind of picking there the CapEx plans.
And can you also just give us a mix of the basins that you'll serve again as a reminder.
Clarence Gooden
And what was your last part in your question, a mix of what?
Brian Ossenbeck
The basins, the shale basins that you served, just so we have a sense of where the sand is going?
Clarence Gooden
Our frac business was down about 10% in the first quarter, we will see numbers may be similar to that in the second quarter, it's probably a little too soon for us to speculate on that for the rest of the year because one of the formations that we serve which is both the Marcellus and underneath that the Utica is a different type of formation and in fact the deals in a lot of wet gases as oppose to oil type formations, and so some of the fracking has continued into those areas. And we also are shipping frac to some of the other formations that are not as active and our volumes that we shift to those formations are not in the quantities that other rail carriers are shipping to those formations and those formations are western formation.
What was the first part of your question involving crude?
Brian Ossenbeck
I think that basically covered it, but if you want to I guess give an update on crude given, potentially some of the more safety issues, the tank car standards which we'll probably see in the next month and so, any further initiatives on track inspections, if you can kind of bring us up to the current operating environment that would be helpful.
Oscar Munoz
This is Oscar. I think what you hear and read is very accurate, our process of attempting and to prevent any of the accidents through inspections and a host of other initiatives continues to be a very-very strong initiative not just at CSX but across the industry and to some degree had a very strong alliance with the petroleum producers.
On a tank car standards, we are very anxious to have that standard out there. It's going to take some time to get those cars of this systems, so as sooner the government can release those standards that we can begin to manufacture those I think will be critical, because I think on the mitigation of when night a incident happens, that car and that standard of car is going to be very-very helpful in that process, so we look forward to the government's decision on that.
Brian Ossenbeck
And just quick one on intermodal. You mentioned that the West Coast congestion was impacting East Coast volumes.
Can you give us an update just how that improves or may be it hasn't since the labor negotiations have settled there, so may be what's going on in March and in early April? And then, also when you think about East Coast taking potential share, is there is a lot of infrastructure expansion that needs to be done at those ports or on a CSX network to potentially handle some of that when it does start to land on-shore.
Clarence Gooden
Brian I am certainly not as good an expert on the West Coast as a Western rail carrier is going to be of on answering your questions on the West Coast, I would tell you that it's better today that it was yesterday and it was better yesterday, obviously then it was few weeks ago, but they have certain amount of congestion on the West Coast and a certain amount of backup still exists on the West Coast that is going to take a few more weeks ahead of us to get straight. And regards to the East Coast, we still have congestion on a lot of ports on the East Coast.
There is going to be a requirement for lot of infrastructure improvement on the East Coast to handle the larger vessels, the deeper water requirements that are going to be required for the larger ships and that's going to take place over the next several years. Lot of ports that you are aware, already have plans in place to do that.
Some have plans but no financing in place to do that. And then of course there is going to be a need to have a lot more infrastructure on the land side that support the ports themselves to be able to handle the type of volumes that come into that.
We shortly think that the rails, both Eastern rails who play a big part in what happens in the rail infrastructure that serves the ports. So, I think it's still a couple of years away of being able to see how it will finally shake out on how the infrastructures that's needed to support that growth on the east occurs and exactly where on the East Coast that growth occurs.
Operator
And our next question comes from Matt Troy, Nomura Securities. Your line is now open.
Matt Troy
I wanted to talk about the variables you can identify with some specificity in coal specifically was curious if you have any updated thoughts on your internal work or studies you may have commissioned about what kind of capacity be it tonnage be it volume may be coming offline in 2015 over the next three year period as some of these older coal fired plants are required to shut down. Is there a tonnage at risk number or business at risk number you've developed internally that might help us kind of understand at least what that baseline number might be away from the variables that are harder to predict that are more tied to things like nat gas and other things.
Fedrik Eliasson
I think what we have said. This is Fedrik.
I think what we have said in the past is as we looked at 2015 we identified about 4 million tonnes that removed in 2013 that will going to be impacted by the MATS or Casper rules and then beyond that, we had another 3 million tonnes that we moved in '13 that were going to be falling out in '16 and '17. I think that's our best estimate for impacts from those regulations.
I mean in longer terms we have to understand and better study and see what ultimately comes out of the proposed CO2 regulation.
Clarence Gooden
That's true, but now you also need to be ware there is a lot of capacity at the remaining plants that will be able to pick up a lot of that slack that as it comes out of that system, so it's not as if you know the capacity in total goes away.
Matt Troy
Understood, I just wanted to double check and make sure that there hadn't been change in light of some of the pricing in gas and differentials there. I guess the second question a follow-up would be simply with gas now down taking to 250 range, what's your sense as you look across your customer base the potential impact from switching, is it fully felt at this point and can't get much worse or if we take another $0.25 to $0.50 down and hit that reach a historical low, is there an added or incremental hit to the coal business to those utilities that at that point becomes just too compelling not to switch to gas or are we feeling the full effect now?
Clearance Gooden
I think all the utilities that can switch to gas as the low rates are switching gas have already switched to gas that could conceivably do it, number one. I think number two when you start seeing gas prices get into those type ranges the utilities themselves get nervous about that because what utilities look for is stability not for extreme price changes or price ranges.
Operator
And our next question comes from Ben Hartford of Robert W. Baird.
Your line is now open.
Ben Hartford
I just wanted to get some context to your demand outlook here in the second quarter you talked about the flat volumes year-over-year, I assume that's all and if so given the coal headwind and anticipated declines in the second quarter would suggest a fairly healthy and above seasonal ramp through the quarter comparable to what we saw a year ago. And I am wondering what you're anticipating as it relates to the sequential improvement in volumes on the merchandised and the intermodal side, will it look like 2Q 2014 and what are your customers saying as it relates to some of the pent-up demand in the context of what we experienced a year ago, some perspective there would be helpful?
Clearance Gooden
This is Clearance. I think our view was on the slide that you saw there, towards the end of the presentation where that in 49% almost half of our markets we saw it is very favorable in the food and consumer, intermodal, minerals and waste and equipment markets and neutral in about 22% of the market.
So our ag products we still have a large carryout from the last year's crop. And in fact one of the largest that we have ever recorded in the United States.
The South American soybean crop in particular is strong this year and given the fact that we have a strong U.S. dollar, it's impacting our U.S's ability to export soybeans.
We still have by historical standards a fairly strong export. Automotive on a year-over-year basis essentially be flat with North American light vehicle production at 17.4 this year versus 17 last year, still a large year by historical standards one of the largest since 2000, but flat on the year-over-year basis.
Our chemical business the chemical side of it being relatively flat but with petroleum products still being up, it will be a flat year in a year-over-year basis but flat at a high level and where we're down is in some of the bulk commodities the coal, export coal some of the ForEx products, some metals which as Michael pointed out yesterday on CNBC are being heavily influenced by the imports coming into this country. Steel consumption is very high in the country but U.S.
mill utilization is not high in the country. And by our phosphates and fertilizers that are due to both high inventories and a strong U.S.
dollar that’s allowing some imports into the country. So while we're seeing flat, it's flat at a very high level.
Ben Hartford
And I guess you pointed to that slide if we look at that same slide from a year ago, you had 83% of the volume in the favorable category now at 49 which just to react to that, it doesn't seem as though you have the same type of favorable pent-up demand bias here in the second quarter of '15 as you might have had in 2014 and so you won't have the same degree of seasonal improvement in 2Q '15 as you might have had a year ago, as weather improves and as we work through some of these port congestion issues, is that fair?
Clarence Gooden
That's fair. We won't see the surge that Michael spoke about.
Operator
And now our next question comes from Cherilyn Radbourne, TD Securities. Your line is now open.
Cherilyn Radbourne
Just one question for me and it's on price and I guess what I am wondering is one of the reasons that pricing has been accelerating and expected to continue to accelerate has been that capacity has been tight across the transportation industry. And I am just wondering now that volumes are coming in a bit slower than expected, can you just address whether you think capacity is still tight enough to support the kind of increases that you've been expecting?
Clearance Gooden
This is Clearance. Yes, we still see capacity as been very tight.
For example housing is still robust and that's positive for us. If you notice our minerals business was I think around 11% or so based on a lot of highway infrastructure, projects going on particularly in the region and country that we serve, so we're seeing truck capacity staying relatively tight.
Coast wise barges have been very strong and strong demand, so we still see capacity fairly tight and we still see a strong need for transportation, pricing does seem to be very robust if you look at the spot truck load market it is remaining fairly strong. So we see that it's still a very strong, robust pricing environment.
Operator
Thank you. And our next question comes from David Vernon, Sanford Bernstein.
Your line is now open.
David Vernon
Maybe Fredrik or Oscar, a question for you on the network itself, with respect to the coal business becoming a little bit lower density are there any opportunities to create efficiency by rationalizing some of that what is now lower density pieces of track or is it too integrated into the network to make that type of cost action feasible?
Oscar Munoz
This is Oscar, we took a lot of those actions clearly when we first started to see the coal declines, and it's one of our more variable cost structure businesses as coal is, and so as that volume sort of decreased we are able to decrease the train starts fairly quickly. The infrastructure is a little bit more difficult, it is part of a broader network and the way the -- sort of the rules of the land work is if you run a certain amount of tonnage it has to be maintained at a certain level.
And we've not really gotten down our tonnage in those routes much below what we, what would constitute a large reduction in sort of the capital reinvestment and maintenance that's required. So we’ve done a lot, we'll continue to manage and monitor that, but it is a little bit of integrated into the network as you suggest.
David Vernon
And then maybe just as a quick follow up, could you give us an update on the Virginia Avenue tunnel and when the double stocking there is going to be cleared? And if you guys have tried to figure out what kind of impact that could have on the intermodal profitability?
Michael Ward
Well, we're really pleased there was a group that was trying to have an injunction against us proceeding and fortunately the federal court in DC denied that injunction request last week which allows to commence with the construction. We got a few permits we have to get which we think will come pretty quickly.
We think the first tunnel will be done within 18 months and that both tunnels will be done within a three year timeframe. So that is the last piece of our national gateway, obviously that dramatically improves the economics out of the Mid-Atlantic ports because we can then double stack versus single stack, so great increase in our efficiency and our ability to move the traffic, so we're very excited.
It's been a long process, we've been at it for five years now and looks like we're finally going to start moving some dirt and get this thing moving.
Operator
Thank you. And the next question comes from John Larkin, Stifel Nicolaus.
Your line is now open.
John Larkin
Clarence you laid out a pretty attractive ramp in same-store sales pricing growth starting with the third quarter all the way through the first quarter, you said that would continue and when you said it would continue did that imply that it would sort of level off at somewhere between 3% and 4% or do you see the potential for that to go higher, part number one. Part number two, given that you have 3% more people working on the railroad to provide a service, you've got some inflation embedded in the labor contracts.
How high does that number need to be to absorb the 3% more labor and what I'll call rail inflation? Are you more than covering that with the 3.4 or do you need a little bit more.
Cherilyn Radbourne
On the first part of that question John, I think we have the potential, not the potential -- we will take that number higher each sequential quarter going forward. I don't know how to be any more emphatic and straight forward than that.
John Larkin
Fredrik or Oscar would you comment on the second half of the question?
Fredrik Eliasson
Yes John, and my job is to not let those increased resources and costs sit idly by and we create efficiency that way so that again we maximize where we can get on the top-line with that increasing margin story on the bottom-line.
John Larkin
So there'll be plenty there to derive some margin expansion. And then secondly as a follow on, I did read an article yesterday that talked about some of the operational changes that are going on within the company.
And I've seen this before but there was some discussion of running what used to be a daily train every 28 hours, so that you ended up running six trains where there were seven per week in the past. From an operational point of view how is that working out?
Are you seeing the savings that you hope to see and has there been any degradation in service as a result of this?
Oscar Munoz
John, it's Oscar, and I I've thrown it out a couple of times over the course of the calls, the early returns are great, it's part of our merchandise network is about a 100 trains that we're working through this. And frankly we've seen an immediate reduction certainly in a crew starts and addition to the train length that we're gaining.
We've also freed up about 50 locomotives and the operating measures that we sort of work through from train to ultra power to just velocity and dwell, actually have followed positively. Now certainly milder weather has helped, little bit of volume reduction has helped up.
So we don't want to attribute it all to that but we're very encouraged by the early signs of this. And with regards to any potential concerns I think one of the things you worry about, about running less trains in a given week is that you start sort of messing with your flow through in your terminals and yards.
And we've not seen that anywhere significantly. So at this point again I have good month into what we've seen all the great positive results and very little degradation and the other measures, so we'll continue that for the near future.
Operator
Thank you. And our next question comes from the Bascome Majors of Susquehanna.
Your line is now open.
Bascome Majors
Just curious where do you think you might be on the OR without the almost 1 billion loss in coal that you've seeing since 2011?
Fredrik Eliasson
This is Fredrik. I think that obviously some other assumptions goes into the two, but if you take 1 billion and add it back and the appropriate margin on that I think you're pretty close right around that 65 which we had originally outlined to be at, at this point.
Bascome Majors
And into follow up on that presumably the profitability on what's left in coal is certainly decline from that period both because of the export cuts but the lower utility volumes on the network. Could you refresh us directionally speaking on where the margins in your segments sit by segment from both an absolute standpoint and the incremental margins you see on volume growth here?
Fredrik Eliasson
Well so I think we've said publically before that if you look at our business overall across the 10 or 11 markets, I think coal because of its very -- the way that we operate coal has always been the top end of the margin, also chemicals because of the risk profile. I think those two and I think the good is rest of our business is very homogenous in terms of the contribution to the bottom line that we generally look at this from a long-term economic perspective including asset recovery charges.
Incrementality is a little different depending on whether its unit train versus batch, clearly we're very -- we think that the intermodal margins from an incremental perspective is very attractive as is adding stuff to the batch network to schedule network as well. And then obviously when you add unit trains that does require additional resources wholesale to move that unit train.
So overall I would say that we feel good about what we're in terms of contribution clearly the coal is still at the high end and as is chemicals because of its risk profile.
Operator
And our next question comes from Jeff Kauffman of Buckingham Research. Your line is now open.
Jeff Kauffman
I wanted to focus a little bit on the operating metrics that may accompany service improvement if you're able to hit your goals and targets here. I guess question one is it as simple as locomotives or are we going to require stronger infrastructure in the track whether it's sidings or double track or extra track?
And then I guess secondly, if we look at some of the key operating metrics such as average systems speed, dwell time. Where do you believe if you're successful these metrics can be by the fall and kind of should be within say 12 to 24 months?
And what does that do for you in terms of equipment utilization or ability to grow without incurring incremental cost?
Oscar Munoz
Jeff, it's Oscar. With regards to sort of locomotives versus infrastructure, I think we've done and again we've talked about over the course of the year all the infrastructure investments that we've made different routing protocols, different interchange points.
All of that by enlarge has been invested with regards to the volume we've seen. So we've worked through that part fairly quickly.
On the crew side we've been hiring madly and those folks have gone -- right it gets down to the locomotive space. Long-term from a strategic perspective there is always issues around infrastructure siding as we've run longer trains for instance, some technology to get our hump yards a little bit faster and quicker with the merchandised train that's mixed that’s got to be obviously worked.
But for right now it is a big issue around locomotives which is why there is variable train thing, freeing up 50 locomotives is a very important part of our initiatives. I think as you think with regards to our operating metrics that you see as you know those are very top-line.
There is many, many metrics that we watch inside the company but all-in I think what we've said is that they'll continue to progress forward in the near-term to certainly get above prior year that's our first goal. And then as we progress longer term you said 12 to 24 months, I think inching up to again to a record year we had back in 2013 and that is always going to be sort of our goal over the long-term.
Operator
And our next question comes from Scott Group of Wolfe Research. Your line is now open.
Scott Group
So flat to slight earnings growth in the second quarter comps get tougher in the back half of the year just on a year-over-year basis. What are the offset?
What's the offset there? Where you think you see an acceleration in earnings growth in the second half?
Fredrik Eliasson
Well, I think as we outlined before, the number one priority right now for us is to restore or put the service back to where it needs to be in order to be able to get the assets fluidity that we've been lacking here for essentially five quarters, and as that happens we know that there is a lot of embedded cost that will come out. You also heard Clarence talk about where we are from a pricing and the fact that we expect an increased pricing.
So it's really about pulling those two levers harder and the foundation in order to be able to do that is getting the service level back to where it needs to be because we know a lot of good things happened from that. It's not as I think you're implying in your answer as much of a volume story right now, because the fact that we're cycling for the rest of the year frankly very strong volumes, so it is pricing and it is productivity.
Scott Group
And then other revenue, what was the drop in the adjustments to revenue reserves and is that kind of a one-time thing or is there any ongoing impact there. And then I know it's early but is there any way to think about liquidated damages in '16 if coal is down a lot this year, do they go up or at some point I'm guessing they need to all come down but I'm not sure if that's in '16.
Fredrik Eliasson
So taking your last part of your question first, I think it's a little too early to think about that, I think we'll have to see where volumes come out before that. But I don't expect as much liquidated damages in '16 or '17 as we've seen over the last couple of years, but we will have a better view of that as we get closer to that year.
In terms of the other revenue that's simply just a reflection of the fact that the network slowed down in the first quarter and we have something called in transit reserve and the biggest factor of that decline in supplemental revenue was because of that. So as the network, at a very level of network slows down, you have more of your cargo on the network when you end the quarter and therefore you have more in reserve to reflect that and the network improves it actually comes out the other way so that's essentially all it is.
Scott Group
So we shouldn't have that as a negative impact in the future quarters as the comps.
Fredrik Eliasson
No, you should not.
Operator
And our next question comes from Jason Seidl, Cowen and Company. Your line is now open, sir.
Jason Seidl
Two quick questions, one Clarence getting back to intermodal and obviously some of the shifting has gone on with the West Coast issues, how should we think about yields as some of the freight may move back to the West Coast on the intermodal product.
Clarence Gooden
I would expect that if it moves entirely back, you're talking about international traffic on a transcon basis?
Jason Seidl
Yes.
Clarence Gooden
I would expect the yields to improve to go up.
Jason Seidl
And I guess my follow up question. The STB reauthorization bill that's out there, Michael I was wondering if you had any thoughts about that and what are the potential impacts you know that might come on to the rail industry.
Michael Ward
Jason, we're actually supportive of that bill, we think that it strikes a good balance between some of the things some of our customers we'll like to see and also our need to continue to make sufficient money to reinvest in this business, so we're supportive of it, of course you don't like everything in every bill but I think all in all it’s a good balance and we're hopeful that the House who is generally supportive of the rail industry would take up similar legislation.
Operator
Thank you. The next question comes from Cleo Zagrean, Macquarie Capital.
Cleo Zagrean
Both of my questions relate to pricing and the first one is on coal. Could you please share some insight into same-store price for coal excluding fuel in the quarter?
And your thoughts on the outlook for pricing given volume challenges for each of domestic and exports and if you envisage taking some action there if the volume drop should be stronger than 5%? Thank you for the domestic utilities.
Clarence Gooden
So the first part of your question was same-store sales for pricing coals?
Cleo Zagrean
I am trying to get a sense for pricing ex the fuel noise in the quarter for coal.
Fredrik Eliasson
This is Fred, just to clarify, so our same-store sales that we publish excludes the impact of fuel and there are two numbers that we show in there, one is the overall pricing same-store sales and one is the ex coal. So implied in that is that if you look at the delta I think you can get a sense of what the same-store sales is for coal.
So that makes sense?
Cleo Zagrean
I thought somehow fuel was in the same-store impact. And then the second question, with a strong focus on pricing that we're hearing from you.
Should we expect to see a trade-off in volume growth against the potentially softer spend from peers and maybe continue the adjustment in network resources in response to a more moderate volume growth scenario?
Clarence Gooden
I don't think so necessarily, I think that the value that we're offering our customers, I think at the service levels that we have that are improving, I think given the fact that capacity particularly on the truck side of the business is and with the highway congestion with the driver issues that our customers are facing, with the overall value proposition that rail is offering. I think that our pricing and the value that we're offering I think we can retain the volumes that we have and continue to grow and expand our business.
And I think when you see it for example in this quarter, our pricing and same-store sales and our merchandise which includes our intermodal being at the 3.4 and the fact that our domestic intermodal grew at 9% supports that theory.
Operator
And our next question comes from Keith Schoonmaker of Morningstar. Your line is now open.
Keith Schoonmaker
Thanks a quick follow-on to that comment Clarence, concerning a strong domestic intermodal volume growth. You said this drivers both highly conversion in growth with new customers.
Would you estimate what portion of recent growth stems from each?
Clarence Gooden
Well, I really don't know from the standpoint of new customers because we use multiple channels of sales and it would be difficult to define what some of those new customers are, but I would tell you that a large portion of that's been the result of a couple of programs we have both with beneficial cargo owners as well as our highway to rail conversion programs that we have in our intermodal product, and it has been I think extremely -- both programs have been extremely successful programs that we've had.
Keith Schoonmaker
And then a quick question on coal pricing, you've mentioned the negative impact of both export rate pressure and of fixed variable contracts in the period domestic. Was export by far the most powerful influence or were these factors similarly and significant would you say in the period?
Clarence Gooden
I would say both factors were similarly significant.
Keith Schoonmaker
And could you elaborate just to bit more on the mechanism of the how fixed variable effected the period?
Clarence Gooden
Fixed variable effects in the period where we have whereas the customers take a larger shipments of coal that the larger the shipments that they take based on what their fixed price is that the average rate for that coal shipment comes down.
Michael Ward
Then the fixed portion is shared over more tonnes lowers the rate.
Operator
Thank you. Now our next question here comes from Justin Long of Stephens.
Your line is now open.
Justin Long
I wanted to ask your Eastern competitor said this week that it expects to get back to 2012, 2013 service levels by the back half of the year. For your network do you think that's an achievable target just given the significant or significantly more crews and more locomotives, is that something you have pretty clear line of sight to two at this point, and if not what are the risks to getting back to those service levels?
Oscar Munoz
This is Oscar. I think again being consistent with what we've said we see certainly acceleration towards those levels in 2013 which were for CSX very much record levels.
And again in full transparency I think we'll gradually improve to those levels and I think every bit of improvement will have a nice bottom line impact, but I am not quite ready to prepare to sort of give you a sense that we're going to be back to those record levels in this year certainly striving us for a bit longer term.
Justin Long
Okay fair enough. And then just one quick follow-up, thinking about your second quarter guidance, could you talk about your volume assumption for coal in the quarter?
Clarence Gooden
Well I think as Fredrik has articulated, we expect that coal to be down in the 5% range. It could be slightly worse than the 5% range but at least at 5%.
Justin Long
I just didn't know if that was any different for the quarter versus the full year but you're just sticking to the same guidance.
Fredrik Eliasson
That’s for the full year, we haven't given a specific number for the second quarter but for the full year we think that's the right place to be.
Operator
At this time we don't have any questions on the queue.
David Baggs
Thank you and we'll talk to you again next quarter.
Operator
This concludes today's teleconference. Thank you for your participation in today's call.
You may now disconnect.